One of the key things firms tend to review when valuing a firm in an acquisition or assessing aspects of a merger is the billing rates the firm charges for their services. While this is a critically important thing, simply looking at a chart of what each team member’s billing rate is nothing more than a starting place, clearly not where it ends as it relates to billing rates.
We were consulting on a recent merger where a two partner firm generating $1,000,000 (“Firm B”) in revenues was merging for the purpose of succession into an $8,000,000 (“Firm A”) firm. Firm A expressed concern over the fact that Firm B was only getting $200 an hour for partner time while Firm A was getting $250 +. When drilling down deeper, better information becomes available.
Firm B had no managers or seniors and each of the partners did the majority of the chargeable time that could not be passed down to the juniors and paraprofessionals they had. Firm A realized after our conversation that 90% of the chargeable work Firm B partners were doing would be done by seniors and managers of Firm A (although the partners of Firm A would be the contact people). When we asked Firm A what billing rate their seniors and managers got the answer was $125 to $175… well I guess they are now getting $200!
When accessing such things as billing rates, you need to look at what level staff you will be using, the time and effort it will take you to derive the fees and calculate your billing rate. If your technology is better, maybe it will take you less time and effort and lower staff levels to complete the task. Maybe your peer review requirement means it will take you longer? We cannot look at a piece of paper to make this decision but through proper due diligence, discover how this puzzle will truly work out in the combined successor firm.
For more detailed information on this topic, please click the link below for an article from the July/August 2011 Practicing CPA, an AICPA publication.
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